More mergers and acquisitions among London market insurance brokers are likely if current market conditions persist.

Softening rates for many lines of insurance and reinsurance are squeezing the margins that many smaller brokerages, in particular, are able to make, experts say in reacting to a flurry of M&A interest in recent weeks.

The recent activity includes Willis Group Holdings P.L.C.'s late October announcement that it plans to take a majority stake in independent brokerage Miller Insurance Services L.L.P. and set up a London-based specialty brokerage handling Lloyd's of London and wholesale business.

Separately, independent London-based insurance and reinsurance brokerages Hyperion Insurance Group Ltd. and R.K. Harrison Holdings Ltd. announced earlier in November that they were in exclusive merger talks.

As part of a deal announced last week for Hamilton Insurance Group Ltd. to acquire Lloyd's managing agency Sportscover Underwriting Ltd., the Hamilton, Bermuda-based insurer also will acquire Kinetic Insurance Brokers Ltd., a Lloyd's broker.

Also last week, Towergate Insurance Partnership Ltd., a broker consolidator with Lloyd's operations, said it had been approached by unnamed parties interested in acquiring it.

One source, who asked not to be named, said the proposed Willis-Miller and Hyperion-R.K. Harrison deals are driven largely by the companies' desire to increase their scale in a shrinking London wholesale marketplace.

Another driver of recent M&A interest is considerable downward pressure on rates for many of the lines of insurance underwritten in the London market, notably wholesale business, said Eamonn Flanagan, head of the Liverpool office of Shore Capital Group Ltd.

Declining insurance and reinsurance rates result in smaller commissions paid to brokers, he said. If organic revenue is hard to come by, then brokerages may look to acquire, he said.

And, combining two businesses may reduce costs. Since “revenue minus costs equals profit,” that may further drive M&As, he said.

Increased insurance and reinsurance buyer use of alternative sources of capital add to the M&A pressures, Mr. Flanagan said.

The situation poses challenges for brokers with a more traditional model since larger brokers are more likely to have the capabilities to help alternative capital access the market — if that capital chooses to use brokers at all, he said.

In addition, Mr. Flanagan said, facilities some brokerages have set up to place business in the Lloyd's market may mean that brokers that typically were involved at the bottom of underwriting slips could miss out as facilities sweep up the business.

This is adding pressure on smaller brokers, which includes all but the few biggest players, he said.

Another factor pressuring smaller brokers is the trend among large insurers to deal with fewer counterparties, said Mark Nicholson, a lead analyst of Lloyd's at Standard & Poor's Corp. in London.

Factors adding to the broker M&A interest include good availability of debt and equity financing for potential investors, said Stephen Skeels, a partner and national head of valuations at advisory and accountancy firm Mazars L.L.P. in London.

The recent economic recovery has given acquirers more confidence to spend their money and niche businesses that offer something additional to acquiring companies are likely to be sought-after targets, he said.

A fear of “regulatory creep” also could further M&A interest, sources said.

For example, the Financial Conduct Authority, which regulates brokers in the United Kingdom, launched a review earlier this year of broker conflicts of interest.

While such reviews may not necessarily lead to regulatory action, there is a fear that any action could increase brokerages' regulatory burden, sources said.

Any increased regulatory burden could greatly affect smaller brokers, Mr. Nicholson said, and prompt some brokers to put themselves up for sale, Mr. Skeels said.

A recent report by the London Market Group, which includes representatives of the underwriting and brokerage industries in London and aims to reform the marketplace, said that “maintaining an attractive environment for brokers and carriers will become increasingly important in order to be competitive.”